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Consumer Confidence in Indonesia Growing

  • Sara Schonhardt

Employees prepare their clothes stall as they wait for customers at a shopping centre in Jakarta, August 6, 2012.

Employees prepare their clothes stall as they wait for customers at a shopping centre in Jakarta, August 6, 2012.

JAKARTA — Indonesia's economy has surprised many experts this year by growing at one of the fastest rates among the world’s top economies. Despite a slump in exports due to lower demand from Europe and China, Indonesians are propping up the economy through massive spending on cars, cosmetics and instant noodles.

Rows of saccharine syrup sit beneath flags advertising promotions at Lotte Mart, one of several hypermarkets in Indonesia, selling everything from toys to clothing to groceries.

The promotions coincide with Eid al-Fitr, the end of the Islamic fasting month of Ramadan. For one month Muslims here abstain from food and drink from dawn to dusk, marking the fast breaking with elaborate, food-filled parties. They also buy new clothes, and increasingly, new cars and electronics.

The shopping frenzy marking this year’s festivities highlights how quickly Indonesia’s economy is growing. A rapidly rising middle class is spending more on gadgets and personal care products and shopping more at department stores and hypermarts.

Farrah Aldino, a 26-year-old mother of two children, has filled her cart at Lotte Mart with packets of cookies and chocolate snacks. She says her family’s personal finances still fluctuate, but her husband’s monthly salary is enough to meet their needs.

She says she often shops at hypermarts because the price is lower and there are many goods in one place.

The World Bank says more than 50 million people entered Indonesia’s middle class between 2003 and 2010. While the majority still spends between $2 and $4 a day, wealth is rising rapidly.

Xavier Jean, a corporate ratings analyst at Standard & Poor’s in Singapore, says food products and cosmetics are being targeted toward the middle class that can afford to spend more. But companies are also making an effort to reach low-income households.

“You see a lot more effort on the company’s side to make their products more widely available, more affordable and calibrate to these different incomes levels,” says Jean.

Some analysts predict that Indonesia’s middle class will grow to 150 million people in the next two years. Major foreign brands have taken note, and they are betting on that growth to support sales of diapers, toothpaste and instant noodles.

Unilever, Nestle and Danone have all seen their profits rise in recent years, while success at local department store chain Matahari has attracted investors from Thailand and Malaysia. Jean says established food retailers such as McDonald's and Dunkin Donuts have also seen strong growth.

“On the retail side, modern retailing formats, such as supermarkets, convenience stores, chains like Starbucks, department stores and so on are also growing in importance in Indonesia and high-profile brands such as IKEA have expressed willingness to enter the market in the next couple of years," added Jean.

Strong domestic consumption and rising investments are the main factors supporting Indonesia’s economy. Consumer spending accounts for around two-thirds of the economy, while investment makes up much of the rest.

Despite a drop in exports and rising inflation, second quarter GDP beat expectations, growing by 6.4 percent above the same period last year.

Industries seeing the most benefit are consumer goods companies, convenience stores and the automotive industry. Car sales have posted consistent growth throughout the year, with more than 102,000 cars sold in July, according to the Indonesian Automotive Industry Association.

Outside Indonesia’s major cities and among the sizeable low end of the middle-income segment, purchasing decisions focus more on daily needs. These buyers are the ones most likely to get hit by rising inflation. In recent months prices for corn, wheat and soybeans have spiked, thanks in part to persistent drought in the United States.

But analysts at the market research firm Roy Morgan say so far the price hikes seem to have had little impact on consumer confidence, which is at an all-time high.

The reason, they say, is a strong economy, rising wages and more widely available credit. A shift away from jobs in lower-paid sectors, such as agriculture, also increases disposable incomes.

Newfound purchasing power is changing spending habits among the world’s fourth-largest consumer market. Consumer analysts say Indonesians are moving away from unbranded goods to higher quality, recognizable brands.

The huge number of young buyers, below the age of 30, is also having an impact on marketing. Astri Permatasuri, the head of marketing and communications at Plaza Indonesia Mall in Jakarta, says the firm is hoping to appeal to shoppers with the finances to buy on a whim.

"The economic growth in Indonesia is very good, so as you can see it also affects the consumer behavior toward shopping. Indonesians are very known as impulsive buyers … like, ‘what’s the trend, we have to get it’,” says Permatasuri.

Plaza Indonesia is Jakarta’s first high-end shopping mall, with brands like Louis Vuitton and Balencia. It is also expanding its target market to the under 35 age group, with fashion labels such as Zara and Mango.

Permatasuri says she expects that demographic to have higher buying power in the future, and the idea is to target them early.

Despite such confidence about strong domestic spending, some analysts worry that Indonesia’s fiscal foundations remain shaky.

A recent report by Standard & Poor’s said infrastructure constraints and efforts to tame credit will keep Indonesia’s consumer goods sector from growing at a more rapid pace in the coming years. Meanwhile, increasing competition could limit revenue growth among companies.

“The growth potential of Indonesia has attracted a lot of investment in the consumer sector, both domestic and from abroad," says Jean. "So as more entrants in the market are coming the market is getting more and more crowded progressively.”

That is good news for consumers, who get more choices and better prices. And it is likely to keep the wheels of Southeast Asia’s largest economy spinning as growth engines elsewhere start to stall.
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